Question

i) After the fiscal stimulus in the latest Budget, the federal government is encouraging households to spend their tax cuts on consumer goods rather than saving them. A Keynesian explanation is that saving is a leakage and only the imported component of consumption spending is a leakage.

Indicate T F #

Explanation: Limit 40 words

ii) Policy-makers rely more on fiscal stimulus in a slump when interest rates approach zero.

Indicate     T    F    #

Explanation: Limit 40 words

Answer 1

i) The given statement is true. Encouraging households to spend will lead to growth in employment and productivity which will further lead to growth of the economy. On the other hand, saving money will not lead to its use for the growth of the economy. So money should be spent and not saved.

ii) The given statement is true. One of the major roles of the monetary policy is to reduce interest rate so that people can borrow more and invest more. But with interest rate already zero, policy makers make use of fiscal policy like cut in tax rates to stimulate growth.